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Indian offshore giant Infosys is facing a federal grand jury probe over the use of B-1 visas by its workers, an inquiry that was touched off by a lawsuit filed by a U.S. employee of the company.

Infosys, which relies heavily on visa holders to deliver outsourcing services to U.S. companies, announced this week a subpoena issued by the U.S. District Court for the Eastern District of Texas "requires us to provide information to the grand jury regarding our sponsorships for, and uses of, B-1 business visas."

The company said it plans to cooperate with the grand jury investigation.

Infosys filed notice of the grand jury investigation on Tuesday with the U.S. Securities and Exchange Commission.

A B-1 visa is a business visitor visa that is intended for short-term projects, such as attending meetings and conferences.

The B-1 visa doesn't include the prevailing wage and federal tax requirements that an H-1B visa has.

Separately, U.S. Sen. Chuck Grassley (R-Iowa), who has been asking his own questions about the use of the B-1 by offshore outsourcing companies, said Wednesday that it "appears the B-1 visa program has become a subterfuge for companies wanting to avoid the cap and wage requirements of the H-1B visa."

Grassley released the statement after receiving a letter from a U.S. State Department official acknowledging problems with the visa.

The grand jury probe stems from a lawsuit filed against Infosys earlier this year by Jay Palmer, an Alabama resident and a principal consultant at the outsourcer. Palmer's lawsuit, originally filed in an Alabama state court and then moved to the federal court, alleges that he was harassed at work after refusing to participate in a plan to use workers holding B-1 visas for tasks he contends requires an H-1B visa.

Along with filing the lawsuit, Palmer and his attorney, Kenneth Mendelsohn of Montgomery, Ala., have been meeting with officials of the U.S. Department of Homeland Security and State Department. Mendelsohn said Palmer has been cooperating with federal officials for several months.

Mendelsohn, in an interview, said the grand jury investigation is a based on information that Palmer furnished to federal officials.

The fact that a grand jury is investigating the B-1 visa "validates everything Jay has been saying," said Mendelsohn.

In an April letter to DHS and the State Department, Grassley sought a "thorough review" of how B-1 visas are issued.

Grassley's office today released the State Deptartment's response to his letter.

In the letter to Grassley, Joseph Macmanus, an acting assistant secretary for legislative affairs at the State Department, said that the Infosys litigation "appears to involve misrepresentation in the visa application, rather than a misapplication of visa law." He did not elaborate further.

But Macmanus' letter does acknowledge that B-1 fraud is a problem, and notes that the State Department has "taken concrete steps to combat illegal work performed while in a B-1 status."

Those steps include "specific additional lines of questioning" at visa interviews conducted by consular officers. The officers now "probe for specific details," the letter said.

At one consulate, the B-1 visa refusal rate has since increased by 25%, Macmanus said.

Macmanus also disclosed that in the last year, "five large employers have been suspended from this program as a result of fraud discovered in visa applications filed by purported employees," he said. The suspended employers were not named in the letter.

Macmanus' letter also indicates that the State Department may be getting ready to remove or substantially change a provision in its rules that now allows workers to use a "B-1 in lieu of H-1B visa" if specific criteria are met.

Macmanus estimated that there are fewer than 1,000 B-1 in lieu of H-1B visas issued in any given year. In 2010, Indian nationals were issues 1,722 B-1 business visas, and 294,120 combination B-1/B-2 visas. The B-2 is a tourist visa.

Grassley said the State Department's "efforts are a step in the right direction, but more work will be needed in this area to ensure the integrity of our visa programs. This includes the ability for the department to maintain accurate statistics that will help us understand how we can better close loopholes to make sure that American workers are given first priority for jobs."

Patrick Thibodeau covers SaaS and enterprise applications, outsourcing, government IT policies, data centers and IT workforce issues for Computerworld. Follow Patrick on Twitter at @DCgov, or subscribe to Patrick's RSS feed . His e-mail address is pthibodeau@computerworld.com.